Climate change, pollution, greenhouse gasses, and other environmental factors of fossil fuels have led to research about renewable energy and its viability. Transitioning from fossil fuels to renewable energy has become increasingly innovative and efficient within the past couple of decades. The European Union is one of the leading advocates, which this study aims to focus on. As renewable energy becomes a more viable option, the economic growth in connection with renewables is an important relationship to study. “If the relationship is positive, it could potentially ease the switch to renewables, but if it is negative, the transition might be farther off than expected” (3).
As much as renewables are helping the environment, there are some issues in the process. For instance, to start building renewables, there is a necessary and costly upfront capital investment. Natural gases and coal are around one thousand to four thousand dollars per kilowatt, while renewables (e.g. hydroelectric or wind) are around four thousand to eight thousand dollars. Consequentially, even though the upfront investment is higher, the overall long-term running operation is lower than its fossil fuel counterparts. Patrick Tydir rationalizes this assessment of the process: “The large startup costs go towards two major avenues: the construction of infrastructure as well as the manufacturing of the renewable energy generator (windmills, solar panels, etc.). In essence, fossil fuels have smaller initial costs and larger managerial costs than renewables” (3). From this perspective, in assessing if renewable energy aids in economic growth and lowering greenhouse gasses, one can observe if it is beneficial and has helped the EU economically progress.
Greenhouse gases are a negative externality that will lead to harm or benefit to a third party. For instance, “In the situation of greenhouse gases, if you prevent them from being produced, you hurt the industries and people which rely on them and increase the cost of production for any goods which currently depend on them, even if the environment benefits from reduced emissions. On the other hand, if you allow them to maintain course, the environment is worse-off, but the industries which depend on them are not impacted” (9). Governments can combat negative externality by increasing renewable energy or other alternatives and reducing non-renewable energy. To further action against negative externality, the government could reduce the supply and demand of greenhouse gasses like pollution credits. Pollution credits would give the company a set standard for how much pollution they are allowed to produce in a period (11). The company can sell these credits to other companies and fuel funding towards reducing their greenhouse emissions. Conversely, the policy would increase costs on consumers, such as an indirect tax on oil or coal, that would decrease demand for non-renewable energy. This can be a solution to switching to renewable energy in an unharmful way, since “abruptly reducing greenhouse gases could lead to a global energy shortage, increasing the price of energy, reducing production, lowering income, and raising unemployment” (11).
At the end of this study, Tydir finds that through his three models (The Standard, Lagged, and Full Models) “public renewable energy spending had a positive but insignificant effect on economic growth” (32). Also, the research showed that Private Investment has a positive relationship with economic growth rate, while the Percentage of Government Spending and Life Expectancy has a negative relationship with economic growth. Tydir concludes that further research should be conducted to determine the impact of renewable energy on economic growth since the research does not confirm or negate that renewable energy spending increases economic growth by the increase of capital formation.
Patrick Tydir is a graduate of the College of Social Sciences and Public Policy at Florida State University. This post was based on Patrick’s honors thesis, written by COSSPP Blog Intern, Lindsey Anderson.